Does Supply Chain Management Software Make Sense in Wholesale Distribution?
Growing competitive pressures compel strategies and tactics that yield
efficiency and efficacy within virtual supply chains. This is especially
true for middle tier suppliers. For example, distributors are finding
that they need managers who are not only good expediters and know their
products, but who also understand how to use decision support tools to
make their work more effective. Advances in information technology now
make it more feasible for distributors to adopt these tools such as supply
chain management software. This paper examines the steel service center
segment of the wholesale distribution industry as a case in point of the
challenges facing distributors and the relief offered through supply chain
is Part Two of a three-part note. Part
One defined the Challenge faced by wholesale distributors. This part
discusses the Critical Objectives in meeting this challenge. Part Three
covers meeting the objectives with Supply Chain Management Software.
As anyone in the wholesale distribution business knows, there are some
objectives that are critical to removing time and money from operations
and enhancing competitive advantage. They include:
return on assets
of the steel industry provides a detailed perspective for examining
the special attention that distributors must pay to these objectives.
While steel service centers face some specific concerns, many of the
challenges pervade the distribution business in general.
A small proportion of the inventory will have some consistency in demand,
but for the bulk of the SKU's, demand will often be lumpy or intermittent.
Not all steel of a given dimension will have the same quality or properties.
For example, hardness, tensile strength, and surface quality may all vary.
Inventory supplies for various end uses must have the appropriate properties
associated with quality. The inventory is heavy and expensive to transport,
so movement should be minimized. Not only must steel service centers manage
unprocessed steel (plate, coil, bar, etc.), but OEM's are increasingly
asking their steel service centers to hold processed materials (slit coil,
cut-to-length, plasma cut patterns, etc.) for just-in-time delivery as
well, increasing pressure on margins and taxing their ability to manage
Achieving the key milestone of quality service remains a non-trivial problem.
Simply increasing overall inventory levels is not only unprofitable, but
also ineffectual. The right inventory of the appropriate quality needs
to move to the right place, at the right time, and at the right cost.
This means that raw material purchases must be carefully timed and allocated
to the service center locations. Processing schedules must be reliable
and flexible. Finished goods inventories must be managed for extremely
short delivery lead times and for exacting quality standards. Outbound
trucks have to be scheduled precisely, loaded efficiently and routed optimally.
Naturally, all shipments should be closely tracked.
Careful planning must coordinate purchases with mill rolling schedules
while synchronizing supplies with projected demand. Challenges exist here
because mill schedules are inflexible and result in relatively infrequent
delivery opportunities. As a result, service centers will often need to
hold significant levels of inventory. Mill purchases may need to be supplemented
with opportunistic purchases from other service centers. Achieving the
right blend of procurement opportunities is crucial to profitability and
a very significant challenge.
Return on Assets
Very expensive, precision equipment is required to handle and process
steel. While machines often have some overlapping capabilities, different
machines that perform the same function cannot necessarily process the
same order. Machinery with more exact tolerances must be used for certain
end applications. Also, similar machines often have different processing
rates. These factors must be considered when planning long term capacity.
If too little capacity exists, then the service center may not be able
to respond quickly to changes in demand. If too much exists, then the
investment is not producing sufficient return.
considerations must be carefully, but quickly, evaluated when scheduling
operations. Setups should be considered. While separate setup stations
are sometimes used to build the setup for the next run, setup time may
still be reduced through sequencing jobs in a manner that simultaneously
considers tradeoffs among total setup time, demand priority, order due
date, penalties for being late, and inventory risk.
concludes Part Two of a three-part note. Part One discussed the Challenges
faced by wholesale distribution. Part Three will cover meeting the objectives
with Supply Chain Management Software.
MARK WELLS has worked for the past 20 years on many aspects supply chain
management from within industry, as a supply chain consultant, and as
part of a software development organization. For two years, he worked
for a steel service center as an internal consultant. He holds an MBA
from Drexel University where he has also taught operations management
and operations research. He currently works for the applications development
division of Oracle Corporation, focusing on supply chain planning.
can be reached at firstname.lastname@example.org.